M&S remains cautious despite trading success

By This Is Money
Updated: 05:43 EDT, 24 May 2011

M&S has revealed a jump in annual earnings but sounded a note of caution about trading in the current 'challenging' economic climate.

The retailing giant generated a 12.9% increase in underlying pre-tax profit to £714m in the year to April 2.

Group revenue was 4.2% higher at £9.7bn, and the total annual dividend was boosted by 13.3% to 17p.

M&S said industry figures showed it grew its clothing market share in the year by 0.5% to 11.7% and food market share by 0.1% to 3.9%.

Chief executive Marc Bolland said the company, which runs 600 stores in the UK and 300 overseas, had a good year and traded well in a challenging environment.

But looking ahead, M&S said: 'We have had a good start to the new financial year but we expect trading conditions in the year ahead to be challenging due to rising pressure on consumers' disposable incomes and high commodity prices. As a result we are cautious about the outlook. '

The company added that it was confident in the long-term growth prospects of the business despite the current climate of economic uncertainty.

Shares in M&S fell 4.8p to 392.2p in trading today.

The results are the first to be delivered Mr Bolland, who took up his role a year ago after leaving supermarket Morrisons.

The Dutchman unveiled a strategic review for the business in November, which involved increasing the rate of overseas expansion, making cost savings in its supply chain and a revamp of its various labels to create 'proper brands'.

M&S said it was able to drive market share growth by offering customers more choice and appealing to a 'desire to trade up'.

The company said sales of its 'better' and 'best' ranges such as cashmere knitwear and its Autograph brand were strong.

It added that a range of innovative products were also driving sales, such as its Nearly Naked lingerie range, which is designed to disappear under clothing, and its water-resistant Stormwear suits.

In food, the company continues to benefit from its successful 'Dine in for £10' promotion - and it sold 15m meals during the year. M&S Direct - its online outlet - saw a 31% increase in sales, outperforming the online market growth of 20%, with its website now receiving more than 3m visits per week.

The group said it was using social media to engage with customers, with more than 295,000 Facebook fans and 26,000 Twitter followers.

It has also been helped by an advertising campaign featuring X-Factor judge Dannii Minogue and former footballer Jamie Redknapp.

Mr Bolland has revealed plans to revamp store layouts after customers told the company they found outlets 'difficult to shop.

A number of pilot stores will be trialled in October, reflecting a new space template, complete with new signage, packaging and labelling to improve navigation for customers.

M&S added it hopes to have a new online platform ready for 2013/14 after it terminated its contract with Amazon.

View from the City

'We believe positive top-line momentum can be sustained despite the deteriorating outlook for consumer spending,' said analysts at asset manager Investec.

'M&S's customer is the comfortably middle-aged rather than the squeezed middle; its relative pricing advantage should support market share gains; and systems improvements should deliver a better hit rate in sales.'

Tom Gadsby, analyst at asset manager Matrix, said: 'While commodity prices remain high, M&S has managed to maintain its pricing architecture at a time when others (H&M, Primark) have been cutting prices and sacrificing margins.'

'With cotton prices looking as though they have peaked, pricing pressures should begin to ease.'

Freddie George of broker Seymour Pierce believes the stock will now see a period of consolidation after an almost 15% rise in the share price over the past quarter.

'There does not appear to be any radical change on the strategy we believe over the next three years as per the statement,' he said.

'There is still an opportunity to reduce costs while savings arising from the rationalisation of the IT and logistics network have, in our view, been under-estimated. We also consider the company has good potential to develop both international and internet sales.'